Nowadays I take the existing trade mechanisms in commodities for granted. Rules and regulations on the exchange are just there and the market embraces them or works alongside them. My job and interest is mostly to facilitate the administration of the consequences. Enabling our clients to leverage these regulations and trading mechanisms in our Agiblocks Commodity Trade Risk Management (CTRM) Software.Many do not realize that all these rules and regulations are the result of multiple centuries of evolution, experiences and disappointments which shaped the situation of where we are now.

An interesting read on this is the history of the CFTC, the US Commodity Futures Trading Commission. In this article they provide an impressive detailed overview of all changes and foundations in commodity trade since 1848. It is an interesting read because of the detail you gain in understanding what a commodity makes a commodity. In the background of a product being homogeneous and as well being listed on a commodity exchange. Where adding wool tops to that list in 1938 is definitely one of my favorites. It also shows the challenges of protecting the integrity of a commodity market. Each new regulation or rule was obviously a reaction to some event.

A worldwide initiative

When reading this, you realize that it describes the history of commodity trade in the United States. Where in Europe and Asia similar history was made. Sometimes following the United States but also setting the trend. Most people from the industry see the establishment of the Osaka Rice Exchange in 1697 as the start of the modern era of commodity trade. The Dojima Rice Exchange was the first commodity futures exchange and founded by Samurai to be able to control the rice market. Around that time and in the 18th and 19th century many initiatives were worldwide undertaken to control and regulate markets. Initiatives to enable trade were already there much earlier. Like the Royal Exchange in London in 1571 during the reign of Queen Elizabeth I and the opening of the Exchange of Hendrick de Keyser in 1611 in Amsterdam. Trading derivatives started there in 1668.

Technology possibilities always had a huge impact on regulations. Information at that time was not as available as it was now. We are used now to check the prices on our smartphone and have instant information. In these days having first access to an arriving ship could make a big difference between profit and loss. I can imagine that just a little more information about supply and demand at the Jerusalem Coffee House, off Cornhill which can be seen as the predecessor of the London Metal Exchange (LME) and it would create some opportunity there.

Timely information is important

Even in the mid-20th century this was important. I remember to have read in a history commodity trade book the story about a trader at the CBOT. The trader ordered the firefighting department during a long period of drought to wash the windows of the Chicago Board of Trade (CBOT) building. By the time the other traders figured out it wasn’t raining, the price of wheat had gone up significantly. Allowing some good profit for the man who called the fire fighters. Unfortunately I have never been able to find the story online. If you have a reference to it, please leave a comment.

What triggered this evolution of regulation and rules in commodity trade? Obviously the organization of people who wanted to trade and avoid risk. This occurred mostly in the 16th and 17th century and the logical evolution of regulation and rules came in the centuries thereafter. Nevertheless it was not only the organization itself because the world became aware of certain events. As a result proving the necessity of regulation. These events impacted personal lives and economies and are of all times.

Multiple examples how regulation responds

Recently the mortgage crisis is a good example. In commodities the tin crisis in 1985 is still in many peoples mind. Black Swans and crisis were there and will occur also in the future, but in the 17th century it was the first time they occurred by human action in trade. Prior to the 17th century crisis occurred mostly because of weather or war. In the 17th century this changed with I guess the most prominent example: ‘Tulip Mania’.

The first major event created awareness

By the end of the 16th century Dutch traders took the first tulips back to Amsterdam from Turkey. Sultan Suleyman the magnificent provided some bulbs to Ogier Gisleen van Busbeke. Who was the Ambassador of Vienna in Istanbul. Who then gave some to Carolus Clusius who became professor at the University of Leiden in 1593. At that time The Netherlands was in a rising economy because of worldwide trade relations and establishments. Especially the trade in spices was very lucrative and as there was money to spend. A rare product as the Tulip was wanted and appreciated. The tulip is a bulb flower; it is a product which can practical be traded. You simply trade the bulb after all before it becomes a flower.

Regulations will keep respond to the markets

In the stream of events something happened which is unpredictable. A virus affected the tulip. The virus did not destroy the flower but made it even more beautiful and rare. Causing beautiful flames to appear on it. All the ingredients were there to form the first trade bubble. A booming economy and a rare product in demand. Some merchants started to speculate on a higher prices. They sold their real estate for example to make a profit. The tulip mania started in 1634 and ended in February 1637. Hence Leaving many devastated and bankrupt behind. The world would never be the same. Slowly the awareness grew for the need of rules and regulation in commodity trade which would settle in the next centuries.

While I write this I am actually in Istanbul and I look at the mosque of Suleyman the Magnificent and I realize the possible impact of giving a flower. I wonder about how things in history can be connected. The next bubble might already be in progress. Caused by now considered minor events. The only thing we know for sure is that the regulating authorities will act on it with new regulations, after it occurred of course…

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